Prorate Convention in Fixed Assets

Before we discuss depreciation it is worth to discuss prorate conventions as there are wide variety of prorate conventions and each of those prorate conventions has implication on depreciation calculation.

Definition:

The prorate convention determines how much depreciation to take in the first and last year of an asset’s life based on when you place the asset in service.

Since assets can be acquired at any time in a given period, we must have a convention for treating each instance. Should we count a whole period’s depreciation if the asset is added at the end of the month? Should we take a half period’s depreciation if an asset is added past a certain point in the period? The date placed in service is very important in every case.

Thus, together with the date placed in service, the prorate convention helps to determine the prorate date. It is this prorates date that actually determines the proper amount of depreciation to take in the first and last years of asset life.

You can define prorate conventions with prorate dates that have a variety of effects. You can also use the same convention as your prorate and retirement conventions. Three of the more common prorate conventions are:

• ACTUAL MONTHS CONVENTION, OR CURRENT MONTH: Takes one month of depreciation for the month you acquire the asset. Does not take depreciation in the month you retire the asset. For a retirement convention, does not take depreciation in the month you retire the asset.

• FOLLOWING MONTH CONVENTION: Does not take any depreciation in the month you acquire the asset. Takes one month of depreciation in the last month of asset life. For a retirement convention, take one month of depreciation for the month you retire the asset.

• MID-MONTH CONVENTION: Takes half a month of depreciation in the month you acquire the asset. Takes half a month of depreciation in the last month of asset life. For a retirement convention, take half a month of depreciation in the month you retire the asset. An asset is considered retired on the midpoint of the retirement month.

• MID-QUARTER CONVENTION: Takes half a quarter of depreciation in the quarter you acquire the asset. Takes half a quarter of depreciation in the last quarter of asset life. For a retirement convention, take half a quarter of asset life. For a retirement, convention, take half a quarter of depreciation in the quarter you retire the asset. An asset is considered retired on the midpoint of the retirement quarter.

Examples of different Half-Year prorate conventions:

• HALF-YEAR CONVENTION: Takes half a year of depreciation in the year you acquire the asset and in the last year of life. For a retirement convention, take half a year of depreciation in the year you retire the asset. The asset is considered retired on the midpoint of the year retired.

• STANDARD MODIFIED HALF-YEAR CONVENTION: Takes a full year of depreciation in the year you acquire the asset if you acquire it in the first half of the year. Does not take any depreciation if you acquire the asset in the second half of the year. For a retirement convention, take a full year of depreciation in the year you retire the asset if you retire it in the second half of the year. Does not take any depreciation if you retire the asset in the first half of the year.

• ALTERNATE MODIFIED HALF-YEAR CONVENTION: For a retirement convention, take one fourth of a year of depreciation in the year you retire the asset.

• ACRS HALF-YEAR CONVENTION: Takes a full year of depreciation in the year you acquire the asset. Does not take any depreciation in the last year of life. For a retirement convention, does not take any depreciation for the year you retire the asset.

Prorate Conventions: Examples

Month-to-Month

Month-to-Month is the most common prorate convention and calendar setup. The depreciation calendar and prorate calendar are exactly the same: a standard 12 month calendar with each period corresponding to a different month.

1) Set up your depreciation calendar first.

Simply navigate to the Asset Calendars form and enter periods for all relevant years.

2) Set up your prorate calendar next.

A Month-to-Month prorate calendar has exactly the same 12 periods, so you can enter the same calendar name in both fields in the Book Controls form.

3) Finally, choose your prorate convention.

Let’s choose a Current Month Prorate Convention. Simply navigate to the Default Depreciation Rules zone of the Asset Categories form. You can also specify the prorate convention in the Books window during the detail additions process.

Thus, an asset with a date placed in service anytime at all in January will have a full month’s depreciation for that period. In the period retired, or the last period of the asset’s life, the asset will not have any depreciation taken.

TIP: Select the “Depreciate When Date Placed In Service” check box if you want to start taking depreciation in the accounting period that corresponds to the date placed in service, instead of the period that corresponds to the prorate date. This option determines over how many periods to spread the annual depreciation amount. For straight-line depreciating assets, Oracle Assets always starts taking depreciation in the accounting period that corresponds to the prorate date.

Depreciate when placed in service flag

Designates whether to start taking depreciation in the accounting period that corresponds to the date placed in service or to start taking depreciation in the accounting period that corresponds to the prorate date.

Navigation: Setup → Asset System →Prorate Conventions

For more information on prorate conventions please refer support reference document mentioned below, you will find examples for Mid-Month, Daily and Common Tax Setup etc.